David Welker: After reading Wright and Evan’s “response” to Levitan, I think we can conclude that the original study funded by the American Bankers Association is in fact indefensible.Here is what is not done in the Josh Wright’s “response.” An actual defense of the methodology used in his paper. It is just a bunch of smoke and mirrors, as is the desperate proposal to have a bet.No where in Wright’s response does he deny that the following is an accurate description of his methodology:
This same criticism is made in the actual paper criticizing Wright as well:
Oh wait. Josh Wright objects! This is meant to be a lower bound, not a precise estimate. Here is the actual methodology:
Oh, that makes it all better!This number is garbage either way. As for the rest of the “analysis” presented in the paper, they have a saying in computer science. GIGO: Garbage-In, Garbage Out.Given Wright’s failure to deny that this is the methodology he used in his response to Levitan, I will take it as an admission that it is an accurate description of the methodology he employed.If this what constitutes “evidence” for Josh Wright (whether for a lower bound or for a precise statistical estimate), he has no business being a professor.What does Wright do in his so-called “response” to Levitan? What he does is talk about everything except for his bogus methodology. He tries to shift the burden of proof to Levitan. But that is an invalid move. Levitan isn’t trying to perform his own empirical study. He is pointing out that the methodology that you used is bogus. Respond to that claim. Defend your methodology.Here is a lesson in logic 101 for Josh Wright. Levitan does not need to perform his own empirical study in order to point out that the “methods” that you employed to arrive at your “empirical” findings are garbage.The betting and Wright’s response is a bunch of smoke and mirrors. His work is not scholarship and cannot be defended as such. That is the bottom-line. That explains why Wright does everything in his response except defend his methods.

You’re absolutely right. The study is laughable. It doesn’t even mention which aspects of the CFPA would actually lead to a decrease in credit. The best candidate — the requirement to offer a “plain vanilla” mortgage — is already out of the bill. Barney Frank dropped it at the beginning of the markup. The inadequacy of the “study” does not mean that the CFPA is a good idea or that the premise that consumer fraud caused the subprime credit is correct. In fact, the qualitative arguments that an activist CFPA could cause a contraction in credit and in purchases may very well be right, but that’s also true of the Fed’s, and HUD’s, new-found aggressiveness, which started as the Bush Administration was winding down and which we’ve heard very little about from Zywicki and company. It’s the quantitative analysis that’s a complete joke.

Law firms and universities both have very high stated prices. Universities demand lots of financial information about applicants, which they use to figure out how much the applicants are willing to pay. Then they give discounts (usually called “scholarships”) to those who they think are price-sensitive. Similarly, every biglaw firm that I know has both “standard” and “discount” rates, and often a range in between. Price sensitive clients negotiate to get lower rates; clients for whom other factors are more important (e.g., reputation for cutting edge work in a particular field) don’t.

Credit card companies often increase interest rates for rather specious reasons. When they have bumped up my rate, I call and threaten to cancel the card, and I have never had a company refuse to restore the lower rate. (I try not to carry balances at all, but it happens.)

Finally come six pages of “analysis” to generate their numbers. This is the part Levitin attacks, and his attack is accurate. Numbers are pulled out of the air, wild assumptions made, data misrepresented.

It’s true that Levitin makes no estimates of his own, about which I would say this:

1. That’s not his objective in writing the critique.
2. That Levitin did not make any estimate is no excuse for the silly work produced by E&W.

Is that the proper test of the CFPC act? If the act’s goal were simply to sustain or increase gross consumer credit, yet. But scarcely anyone argues that is its goal. Some argue that it is intended to end various abusive practices of credit card companies — practices that are indeed contained in their ever-shifting contracts with consumers, including clauses that allow the credit card company to change the contract any time unilaterally. There are, it seems to me, good reasons having to do with the integrity of contracts as legal instruments to argue that some of the proposed restrictions make sense. Libertarians, it seems, argue that contracts are sacred, including contracts that would, under other circumstances, be unconscionable (i.e., one party can unilaterally change any term any time — reminds me of a medieval village that claimed to its lord that the village had received various privileges of autonomy and tax exemption…including the privilege of not having to show its privileges.)

Others, at least implicitly, take up a very old argument — one which ought to be popular among anyone believing in some kind of ‘natural law’ — that excess interest on debt, however collected, is “usury” and eo ipso immoral and abusive.

A third perspective might point out that consumer credit has been used to create, for many borrowers, the modern equivalent of the ‘company store’. Would those here who defend the credit card companies also defend traditional company stores, for whom actually collecting on debt was never a primary goal, since eternal servicing (together with the concommitant binding of people to a location where there was a monopsony employer) was more lucrative?

For anyone arguing in favor of a CPSC, fluctuations of credit volume would have no probative effect whatsoever, and would therefore not be a good basis for judging the act and its consequences. (I realize that among economists, one might want to make such a bet and think it mattered: and for such people, please also consider adjusting your investments on the basis of economists’ predictions, and see how you are doing in 5 years!)

Back during the debates over the 2005 bankruptcy reform act I wish that I had thought to make a wager on whether bankruptcy filings would decline following the reform.

Why do you wish that? The way filings are trending, you’d be likely to lose such a bet, if it were made over a reasonably long term.

The paradigm resembles the following:

A: I have consulted the star charts, and they tell me GNP will grow by 1% in the fourth quarter.
B: But astrology is completely bunk!
A: Okay, so do you want to bet on whether GNP will grow by 1%?

Put your money where your mouth is. Send Wright an email proposing terms for the bet.

No, I would rather that Wright explain how he proposes to do such a bet. Then we can talk about whether his proposal actually measures anything.

Anyway, the bet is a bunch of smoke and mirrors. It isn’t going to salvage Wright’s reputation. He put his name on this study with its garbage methodology. No amount of betting is going to change that.

Causation isn’t backwards. I stated that perhaps they increased the rate higher than they would have without looming legislation. They increased rates before CPFA the same as car insurance companies increase rates when you do something that indicates your risk has increased (speeding tickets, DUIs, accidents).

The point is, credit card companies have been engaging in these abuses for years. That they are trying to get one last bite at the apple while they still can is not surprising. It just confirms what we already know about them.

If they didn’t engage in abusive practices in the first place, the CFPA would not be necessary. It is their behavior that caused the CFPA. It isn’t the CFPA that caused their behavior. The latest moves by the credit card companies are all quite typical.

With CPFA on the horizon, cc companies realize that risks will have to be spread from high-risk customers onto customers that otherwise would merit lower rates.

You misspelled “charges” (or “costs” … or “profiteering”).

Cheers,

Here is what is not done in the Josh Wright’s “response.” An actual defense of the methodology used in his paper. It is just a bunch of smoke and mirrors, as is the desperate proposal to have a bet.

No where in Wright’s response does he deny that the following is an accurate description of his methodology:

The short answer: he just make up the numbers. I kid you not. Evans and Wright selectively chose a study on the impact of a different regulation (interstate banking restrictions) on credit cost. They briefly argue it is analogous to the CFPA Act, which they claim will have double the impact. (Why double? Why not?)

This same criticism is made in the actual paper criticizing Wright as well:

The fallacies in Evans and Wright’s argument are readily apparent when it is reduced to its logical syllogism: Regulation A resulted in the cost of credit rising by X. Therefore, regulation B will result in the cost of credit rising by 2X.

Oh wait. Josh Wright objects! This is meant to be a lower bound, not a precise estimate. Here is the actual methodology:

Regulation A resulted in the cost of credit rising by X. Therefore, regulation B will result in the cost of credit rising at least by 2X.

Oh, that makes it all better!

This number is garbage either way. As for the rest of the “analysis” presented in the paper, they have a saying in computer science. GIGO: Garbage-In, Garbage Out.

Given Wright’s failure to deny that this is the methodology he used in his response to Levitan, I will take it as an admission that it is an accurate description of the methodology he employed.

If this what constitutes “evidence” for Josh Wright (whether for a lower bound or for a precise statistical estimate), he has no business being a professor.

What does Wright do in his so-called “response” to Levitan? What he does is talk about everything except for his bogus methodology. He tries to shift the burden of proof to Levitan. But that is an invalid move. Levitan isn’t trying to perform his own empirical study. He is pointing out that the methodology that you used is bogus. Respond to that claim. Defend your methodology.

Here is a lesson in logic 101 for Josh Wright. Levitan does not need to perform his own empirical study in order to point out that the “methods” that you employed to arrive at your “empirical” findings are garbage.

The betting and Wright’s response is a bunch of smoke and mirrors. His work is not scholarship and cannot be defended as such. That is the bottom-line. That explains why Wright does everything in his response except defend his methods.

Cheers,

My guess is that something in your credit report triggered a likely-to-default flag, so they bumped the rate while they could….

Yeah … like canceling my other cards, perhaps? There’s a score they use, the ratio of debt to credit limit. If you cancel your unused cards, you reduce your total credit limit by the amount that these cards have proffered you. So your debt to limit ration goes up, even if you don’t owe more (and perhaps less if you pay off balances on the cancelled cards). Does that make sense? No, sorry, this 30% was from such notables as Citibank and BoA. They need no reason to change interest rates; they can do it to you even if your credit score is rising. That’s the beauty of the system as it stands.

… Perhaps they increased it higher than they would have otherwise, in anticipation of looming legislation….

Bingo, Sherlock.

… After all, their other customers who are likely to default in the next year or so can’t be given a 100% rate, so the risk is shifted to the remaining customers.

And does this make sense to you?!?!?

Cheers,

(1) Click on the links in the post.

The bet is whether consumer borrowing will drop by 2.1%. How to measure that is subject to negotiation.

Put your money where your mouth is. Send Wright an email proposing terms for the bet.

(2) Causation isn’t backwards. I stated that perhaps they increased the rate higher than they would have without looming legislation. They increased rates before CPFA the same as car insurance companies increase rates when you do something that indicates your risk has increased (speeding tickets, DUIs, accidents).

With CPFA on the horizon, cc companies realize that risks will have to be spread from high-risk customers onto customers that otherwise would merit lower rates. The same thing would happen if you passed a law saying that car insurance companies can’t increase your rates. Anyone that fits a “might get a DUI” profile gets an early increase in rates (before the law is enacted) instead of waiting until the DUI happens. Others might get a rate increase simply in anticipation that everyones’ rates will have to rise a little (instead of just a big increase on certain high risk customers) after the legislation is effective.

It sucks to be us, but TANSTAAFL. This is what we asked for.

The bet is completely non-substantive. It is a bet about the future versus a hypothetical world that will never exist. Even in the future, it will not be verifiable.

My guess is that something in your credit report triggered a likely-to-default flag, so they bumped the rate while they could. Perhaps they increased it higher than they would have otherwise, in anticipation of looming legislation.

Credit card companies engaged in this sort of behavior before the legislation was proposed. I think it is kind of funny that you think the causation runs backwards. It is this sort of unconscionable behavior that caused the need for this legislation in the first place.

In order to prove just how horrible the CFPA is, Todd (BFF of the credit card companies) trots out horror stories of how the credit card companies are using the time before the law takes effect to take full advantage of the ridiculous terms they have written into their credit card contracts to jack up interest rates on consumers.

Does anyone else see the inherent contradiction in this argument?

The proposed “bet” is a total distraction and not worthy of being dignified with a response. It smacks of a desperate attempt to obtain credibility as a substitute for actually defending the “methodology” used in the paper. The only thing that is relevant is a defense of the methodology used.

My guess is that something in your credit report triggered a likely-to-default flag, so they bumped the rate while they could. Perhaps they increased it higher than they would have otherwise, in anticipation of looming legislation. After all, their other customers who are likely to default in the next year or so can’t be given a 100% rate, so the risk is shifted to the remaining customers.

If you have a complaint with this — well, this risk-shifting is the intent of the CFPA, after all. It was just implemented sooner rather than later in your case.

I suggest you shop around. Perhaps another lender is willing to bear the risk of loaning you money.

We’re lucky. We can pay off the cards (barely). What about the poor folks, under water on their house, who have large carry-over balances? “Oh. We’re raising your rate to 30%. Sorry we didn’t consult you, ask you beforehand [didn't you read the small print?], or warn you in advance. If you don’t like it, just pay us off the whole thing up front, now, and turn in your card. Late payment fees apply and interest accrues daily on unpaid balances. Oh, and by the way, did we mention the new fee schudules?…”

Care to explain why people (like us) with above average credit scores ought to be paying 30%? Why pretty much all the banks went to this rate simultaneously?

Cheers,

And of course Delong and Krugman do have empirical research amidst their incivility.

Dotar Sojat: What is the CFPA really supposed to do? What huge unmet need will it fulfill? The only conclusion that I have been able to draw is that it will be a great vehicle for wringing money out of the financial sector for interest groups and provide more fodder for plaintiff lawyers.

Do you think that isn’t the actual intended purpose?

Whatever. We’re tearing up almost all of our cards, and paying the rest off as they come in. Charging a mere 60% of what they’re currently charging used to be considered usury. Now they’re going for first-born sons while they can.

And making one’s own decisions about what’s best without the government interfering used to be considered adult responsibility. Guess the world has changed.

I’ve noticed that all the banks are sending us new “terms” for the cards (presumably in advance of CFPA passage) with new rates of 30%!!!. Coinkydence? “Great minds think alike,” as they say … or do we have just a tad of price-fixing.

Whatever. We’re tearing up almost all of our cards, and paying the rest off as they come in. Charging a mere 60% of what they’re currently charging used to be considered usury. Now they’re going for first-born sons while they can.

Cheers,

But no one could dispute that the liberals in the above group are much ruder than the conservatives.

wm13: I believe that he, like a disproportionate number of lefties, prefers insult to empirical testing.

Wouldn’t that statement itself demonstrate a preference for insult over empirical testing (unless WM has some research to back it up)?